Ecommerce Unicorns lining-up at IPO starting gate. How to identify one early.

In the spirit of an overhyped Cyber Monday and blown-out of proportion mobile ecommerce statistics, I felt it was time for a little unicorn titled link baiting around the topic.  After all, I am a marketing guy and I wanted to show my eight-year-old daughter that the talk of unicorns are cool even with grown-ups right now as well! Special thanks to @AileenLee, @FredWilson and @CBInsights for making the dinner conversations around the house more interesting the past month.

  1. An authentic founder/team
  2. Early organic growth
  3. Proven/potential operational excellence
  4. Attractive market and margins
  5. Companies that are in a position to excel in a changing world

If you are an early-stage company and fit such a criteria, please reach-out to me directly!

Now for those with some time to read…

I was lucky enough to attend the Goldman Sachs Private Internet Company Conference earlier this month in Las Vegas.  It was a fabulous event showcasing some of the most dynamic and scaling private companies with most of ‘Tech’s Big Hitters’ in attendance (still trying to figure out how I got there). Besides the obvious media conversation about the recent Twitter IPO and the reports about Los Angeles based Snapchat turning away several acquisition suitors (good for you Evan, I am #LongSnapChat and #LongLA), the topic of Zulily’s incredible IPO had the attendees buzzing ($ZU has a market cap of over $4B as of today).

It is interesting that ecommerce related businesses always seem to be either very hot or very cold in the eyes of both private and public company investors.  There are many cases of companies getting lots of props and then all of sudden as soon as you turn around the haters jump-on. Over the past few years we have seen the likes of Gilt, ShoeDazzle, Groupon, Living Social, Fab and many more go from the ‘floor seats’ to the ‘cheap seats’.  The reality is this shit is very, very hard and usually takes a lot of time to prove-out success with many ups and downs.  The ecommerce and retail world changes quickly and the larger players and incumbents are not your typical sleepy bunch. You see the likes of Alibaba, Amazon, eBay, Google, IAC, Rakuten (to name a few) move fast, retain talent, play in big markets, have large balance sheets and can afford to make mistakes and place big bets (ie: invest in drones that can do same-day delivery).

So with all that it is easy to ask “why bother” building a company in/around ecommerce?  That is the easiest question – the answer is according to ComScore in the US alone online sales will grow about 15% increase this year and over the next four years will grow from ~$260 billion to this year to ~$370 billion in 2017. Sales over the long weekend (Thanksgiving to Cyber Monday) grew >20%, but even with all that, according to Forrester online retail sales will only grow from 8% of U.S. sales  to 10% in 2017 (thanks @JessicaLessin).  It is very early and many new companies will play large roles in the future of ecommerce and at the same time those playing leading roles now will play even larger rolls in the future.

Back to the Goldman Sachs event, the question coming-out was whether the Zulily IPO has opened the door for everyone else and is ecommerce ‘cool again’ in the minds if investors? The answer is yes.

Well, yes IF:

  1. You are an incredibly well run company (been there before at BlueNile)…
  2. That is growing a rapid rate (think >100% YoY)…
  3. In a very attractive market (mom’s spend money and kids grow)…
  4. With a pathway to longterm profitability (margins are good enough and pointed in the right direction)…
  5. And have a defensible market position

You see it is easy.  The reality is the reason Zulily has the market drooling is the fact that the public markets have only seen a few companies at that stage in the US that have been able to create something so incredibly special.  Zappos and Quidsi and Shopbop never got a chance (Amazon bought them-up). StubHub was purchased by eBay (I got that one right).  Richemont bought Net-A-Porter. The PE guys have their hands on Getty Images and Go Daddy. Asos and Yoox are in Europe.  I would put Groupon (you can knock it, but they are worth $6B) HomeAway, OpenTable, Shutterfly, Shutterstock and Vistaprint on a short list list of public companies that fit the criteria (I am sure I am missing some while obviously excluding Amazon, eBay and all the great travel, real estate, financial and payments companies).

However, the next wave of great companies is lining-up.

Continuing the “is ecommerce back” theme – Andy Dunn, the co-founder and CEO of Bonobos, tweeted recently about whether an Ecom 2.0 IPO wave was beginning.


I agree with Andy. IF you are an incredible company doing special things. There are probably just a handful of companies getting close to such rarified air in and around pure-play ecommerce. I can think of Airbnb, Etsy, Eventbrite, Fanatics, TrueCar, Uber and Wayfair. I am very bullish on all of them and wish I had direct investments in each.  There are many great companies behind them, but I think those are first to go out. The bigger point is that of the thousands of ecommerce, marketplace and transactional businesses that have been funded, maybe 20 have gotten to this level. An interesting point about the 2014 list is only one of them is a pure ecommerce play that “puts stuff in boxes” (Fanatics) and honestly I don’t know enough about their business to know how much inventory they take.  I think Net-A-Porter, Quidsi and Zappos were the last ecommerce businesses at this level involved in a “financial event” that actually take inventory positions (that is a blog post for another day).

You see, it gets back to point that making money and building long-term value in and around ecommerce is really hard.  Only a few have done it and those that figure it out get huge credit and the market responds with extra special love.  All this is a perfect tie to what I think are key areas that investors (private company investors like me and even public market investors) look for when considering backing such commerce related business. I believe these are also some things you should evaluate when you consider working for earlier stage commerce related businesses).

So, what does it take to be an Ecommerce Unicorn?  Here are a few keys that I look for and try and extrapolate forward when looking at deals. Full disclaimer, I have never been luck enough to invest in one, but I hope to!

1) Authentic Founder/Team. A team whom understands the brand they want to build, their product relevancy, their customer, their industry and how what they are going to build is going to create an unfair advantage in the market.  Think about businesses like Amazon, Lululemon, Nasty Gal, Net-A-Porter, Nordstrom, Spanx, Tory Burch, Uniqlo and Zappos.  They share most of these characteristics, starting from the top when it comes to fully understanding why they are building it, what they are building, then positioning it with consumers, employees and partners and then creating something that others cannot replicate.  In Amazon it all about scale, for Lululemon, Spanx and Uniqlo it is fashion-tech and lifestyle, for Net-A-Porter, Nordstrom and Zappos it is about experience.  All of them are different, but all are clearly company defining and very differentiated in the marketplace.

2) Early Organic Growth. Other than using Arial font in a presentation, one-way to get on my bad side early in a discussion is to start talking about marketing ROIs and LTVs.  Simply said, I do not believe customer acquisition capabilities are a defensible tool in a competitive marketplace.  Remember, I am marketing guy and am sure as hell not a marketing hater, but paid acquisition is a commodity business.  Top performing customer acquisition is table stakes to win in ecommerce, but it can’t be the only thing you are good at.  Branding, efficiency, experience, loyalty, point-of-view, product, scale, technology – those are things that make companies special and defensible.  Have you ever heard Etsy, Net-A-Porter and Uber talk about LTVs?  Sure they spend money to acquire customers, but the money they spend is to put fuel on the fire of being great at other things that customers love to talk about.  I like to see business who are growing early by accident.  The accident is the result of something special being created and the market (even early) responding.

3) Operational Excellence. Ecommerce is all about execution.  With inherently low margins, a boat load of competition and everyone using pretty much the same marketing tool-kit and transactional platforms, there is very little margin for error to make ecommerce work and work profitably.  This is usually not something companies in their earliest stage are working on 100%, but I do think it is important to be thinking about it planning for it.  When considering an investment, I usually will look for examples or signals that the team is organized with operational excellence in mind.  For example, at HauteLook, Terry Boyle who is now the President of the business was keenly aware very early that we had to do operations and fulfillment ourselves because no one in the market could do what we needed at scale (from taking pictures of dresses on models to handling/shipping merchandise to consumers less than an hour after after receiving from our brand partners).  If you have never visited a Yoox site, you need to.  I think they are the best globally about getting lots of products produced and published to the site at the highest quality with the lowest cost.  Quidsi is incredible with Diapers.com (and has been for a long-time).  I remember ordering something in 2009 on a Sunday and receiving it on a Monday.  They were Amazon before Amazon and are now Amazon :)

4) Attractive Margins.  I talked about this at length in my Zulilly IPO post, but product margin and gross margin are incredibly important when it comes to evaluating ecommerce businesses.  Zulily’s gross margins (pretty much dollars left after you pay for the product you are selling and the cost for it to be shipped) are just under 30%.  This means for every dollar collected in sales, $0.70 is gone before any expenses such as fulfillment centers, business operations, merchandising, employee salaries, marketing spend, office space, etc.  As a comparison, Lululemon has 56% gross margins while Nordstrom has 39% gross margins.  The difference in margins is primarily the difference between vertical retailers (Lululemon) and horizontal retailers (Nordstrom) in the physical world and Bonobos and Fanatics in the virtual world.  Right now, I am a pretty quick pass on any ecommerce business with less than 40% gross margins (but the IPO success of Zulily has caused me to at least rethink this hypothesis).  When it comes to marketplace businesses, @BillGurley has written the defining piece on marketplace pricing.

5) Positioned to Take Advantage of Changing World.  I needed a catch-all.  There is so much more that must be considered, but I think they can be put in a single bucket.   In short, a changing world providers opportunities for new companies and new types of companies to emerge and be successful.  For example, if you are selling commodity type of products that can be found at Amazon, Best Buy or Wal-Mart, don’t bother, even if you can deliver product via underwater sub drones with a reverse time machine.  However, if your business works dramatically better than what exists today because of things like local, mobile and social capabilities then you are in unique shape. All that needs to be said is Lyft and Uber.  In addition, recognizing a change in customer behavior before anyone else is incredibly important – short attention spans (flash sales), great design elements, desire for transparency, etc. are all examples of key behavioral insights that are impacting the ecommerce marketplace.

Side note:  A couple of blog posts that I think are very good are from Ajay Agarwal and Brian Garrett.  There are countless others, but those two came to mind.

  • http://www.neilthanedar.com/ Neil Thanedar

    I love #2. Look for startups with at least one defensible, ‘unpaid’ channel. Zulily has email. Fanatics has SEO.

    Rocket-ship e-commerce companies eventually saturate their initial growth engines (WOM/PR/Social). At that time, if they have to lean on paid channels, CAC is going to rise significantly and threaten the fundamentals of the business (i.e. Groupon). Having a reliable, cheap traffic base could be the key to surviving the inevitable growth plateaus and making it through to IPO and beyond.

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